The other equation here is that it's not just about the money, it's about the time. People only have so much time. So the more time they spend playing free/cheap disposable games they less time they have to spend playing $60 AAA games. The less time you have to play $60 games, the fewer you buy.
Then comes the value equation. Personally, I already have a 10/10 rule when it comes to paying full price for a game. That is I need to have reasonable grounds to believe I'll play it at least 10 times and for at least 10 hours before I'll shell out $50-60 for it. Because at 10hrs it's now giving the same value as going to see a movie - $6/hr.
So for myself, it doesn't matter how good a game like God of War is, it's 6-8 hrs that's not likely to be replayed and therefore not a full-priced purchase. I'd get it used/discounted or rent it (probably rent it). Although I admit there's a great many who see value in this particular game at full price still. A new IP in the same situation would not fair so favorably.
But by that same token, I'd drop $100 or more for SSBB, CoD, GH or such because they get played for 50-100 hrs, so it's still terrific value.
Now, if games like Angry Birds are hitting the 10/10 equation at .99 then what does that do to the value equation? Worse, what if I buy a $60 game but then end up spending more time playing an addictive free app? Even if we say I get a mere 20 minutes of fun from a .99 game, that drops the value proposition of games in general down to $3/hr, meaning I (the consumer) now need to see 20hrs of enjoyment out of a $60 game to justify it.
These factors drive people to increasing only shell out for those games they are confident they'll get full value out of - Namely games where they have before - Call of Duty, NSMB, GH before it was over milked, etc. Creating what we already are seeing - an increasingly hits based market and increasingly dependant on known IPs.
People become increasingly relunctant to gamble with $60 for a game they might like, when for $20 they can buy 2-20 games that will most likely keep them entertained longer overall.
